Consumer Credit Usage: The Jury is Still Out

I admit it. Mr. ToughMoneyLove was encouraged by data suggesting that many consumer debt addicts were in recovery. Maybe, I thought, people had learned important debt management lessons from the events of 2008 and 2009. I think I was wrong.

Yes – I was fooled by the data. Were you?

According to the Federal Reserve reports I earlier found encouraging, consumer credit balances actually decreased in each quarter from the 4th quarter of 2008 all the way through 2009. Unfortunately, the March 5 data release from the Fed showed an increase (annualized) in consumer credit of 2.5% during January 2010.

Is this a sign that we are reverting to spending money that we don’t have? Or are we just easing back into spending in a moderate fashion.

Actually, that data is even worse than it appears in the Fed report.

Revolving credit balances (the kind that do not have fixed repayment terms, e.g., credit cards) have declined for 16 straight months. Doesn’t that tell us that consumers are using cards less and dedicating themselves to paying down existing balances?

Sadly, it does not.

According to this article, most of the consumer debt “reduction” has come from write-downs by creditors, not payments from debtors. More specifically, although credit card balances fell by $93 billion in 2009, only $10 billion of that decline came from payments. Write-downs accounted for the other $83 billion.

This comment is from one expert quoted in the article:

“For the first time in my 30 years in this business, the dollar amount of card loans finished the year lower than they started,” he said. “That would mean that consumers have either put their credit cards in a safe-deposit box and only get them out for special occasions or that some are cutting them up and not using them at all. And we don’t think any of that is going on.”

What is going on is bankruptcy.

According to Moody’s, credit card charge-offs hit a new record in August 2009 at 11.5%. Now experts are predicting further increases in charge-offs, setting another record sometime this year.

The journey towards responsible spending is not over, for either the government or for the people. The harder truth is that the final destination remains uncertain.

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